3704 / Can an employer deduct contributions made to a simplified employee pension?

Employer contributions for a calendar year are deductible for the tax year in which the calendar year ends. An employer may elect to use its taxable year instead of the calendar year for purposes of determining contributions to a SEP.¹ Employer contributions made on account of a calendar year or an employer’s taxable year may be made as late as the due date (plus extensions) of the employer’s tax return for such year and be treated as if contributed on the last day of that year.² The due date for C corporations is March 15th following the close of such year and for self-employed individuals is April 15th following the close of such year.³ For tax years beginning after December 31, 2015, returns of partnerships and S corporations made on the basis of a calendar year are due March 15, and those made on the basis of a fiscal year are due on or before the 15th day of the third month following the close of the fiscal year.

Example 1. Employer is a sole proprietor whose tax year is the calendar year. Contributions made to a SEP IRA for calendar year 2024 (including contributions made in 2025 by the 2024 tax filing deadline in April of 2025) are deductible for the 2024 tax year.

Example 2. Employer is a fiscal year taxpayer whose tax year ends June 30. The SEP IRA it maintains is on a calendar year. If employer makes contributions to the SEP IRA for calendar year 2024, employer may deduct such contributions on its tax return for tax year ending June 30, 2025.

The maximum employer deduction amount is 25 percent of compensation for the calendar year (or, if applicable, the taxable year).⁴ “Compensation,” for this purpose, includes elective deferrals of the employee and certain other contributions made on a pre-tax basis.⁵

Contributions in excess of the 25 percent deductible limit may be carried over and deducted in succeeding years.⁶ However, the employer is subject to an excise tax on nondeductible contributions ( Q 3939). If the employer also contributes to a qualified profit sharing or stock bonus plan, the 25 percent deductible limit for that plan is reduced by the amount of the allowable deduction for contributions to the SEPs with respect to participants in the stock bonus or profit sharing plan.⁷ If the employer also contributes to any other type of qualified plan, the SEP is treated as a separate profit sharing or stock bonus plan for purposes of applying the combination deduction limit of IRC Section 404(a)(7) ( Q 3938).⁸

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1.   IRC § 404(h)(1)(A).